Bonds don't appear to be doing anything more than meandering in a tight trading range

[phil1ben]

Au contraire, I think you do have a municipal bond fund.

I do not disagree. I have created my own fund out of my individually picked bonds. The point, however, is that anyone could do this. One can buy bonds in increments of $1,000.00. In my opinion, one would need at least 25 bonds to properly diversify.

 

[REWahoo]

The point, however, is that anyone could do this. One can buy bonds in increments of $1,000.00. In my opinion, one would need at least 25 bonds to properly diversify.

Sounds like work to me - and I'm retired.

 

[RetireAge50]

If the fund price goes below the bond market values that would be great. The people exiting the fund would get the panic price and those remaining would be better off (because they paid off people at lower than market value).

 

[audreyh1]

Sounds like work to me - and I'm retired.

+1

I feel the same way about owning individual stocks.

 

[audreyh1]

Rebalancing really helps during periods of market stress where people flee certain asset classes. You buy more. The asset often recovers, then you sell a little to get it back into balance.

If you are holding investments for decades, these little blips are opportunities rather than things to go out of your way to avoid.

I'm sure several of my mutual funds go hit hard in 2008 by redemptions and fleeing investors, in fact, of several years after 2008 investors continued to sell equity funds and buy bond funds. Yet equity funds have been extremely rewarding to own since 2008. And bond funds I owned that got hit hard snapped back very quickly. Every time I've had a fund hit hard by redemptions, it's made an amazing recovery once the selling pressure was exhausted, and if I rebalanced and bought some when it was down, I was generously rewarded later.

If you take a multi-decade view, you don't sweat the small blips.

 

[mpeirce]

> 5. I do not pay any fee except the very small fee charged by Fidelity to purchase a bond (if bought on the secondary market only). No fee for New Issues.

Every time I get interested in buy individual bonds I always run into articles that talk about how the small investor pays exorbitant fees when buying individual bonds.

Set me straight...

 

[phil1ben]

From Fidelity's website the fee is:

Municipals $1.00 per bond Corporates (BBB– or higher), CATS/TIGRS $1.00 per bond Corporates (BB+ or lower) $1.00 per bond

So the fee on a $25,000 Bond would be $25.00. It is important to remember that Bonds are not as liquid as stocks. You must check EMMA to see recent sales to determine that the price you are paying is a fair one. The price differences one sees in trades taking place within minutes of each other is eye-opening and downright troubling. I have seen price differences of 20% for trades taking place within minutes of each other. It is very important that homework is done before a purchase is made.

 

[Options]

Rebalancing really helps during periods of market stress where people flee certain asset classes. You buy more. The asset often recovers, then you sell a little to get it back into balance.

If you are holding investments for decades, these little blips are opportunities rather than things to go out of your way to avoid.

I'm sure several of my mutual funds go hit hard in 2008 by redemptions and fleeing investors, in fact, of several years after 2008 investors continued to sell equity funds and buy bond funds. Yet equity funds have been extremely rewarding to own since 2008. And bond funds I owned that got hit hard snapped back very quickly. Every time I've had a fund hit hard by redemptions, it's made an amazing recovery once the selling pressure was exhausted, and if I rebalanced and bought some when it was down, I was generously rewarded later.

If you take a multi-decade view, you don't sweat the small blips.

+1
Nailed it.

 

[audreyh1]

It is important to remember that Bonds are not as liquid as stocks. You must check EMMA to see recent sales to determine that the price you are paying is a fair one. The price differences one sees in trades taking place within minutes of each other is eye-opening and downright troubling. I have seen price differences of 20% for trades taking place within minutes of each other. It is very important that homework is done before a purchase is made.

I think that is the main issue when they talk about buying individual bonds (not treasuries directly) being expensive for the small investor - you'll way overpay if you don't know what you are doing.

 

[ERD50]

Rebalancing really helps during periods of market stress where people flee certain asset classes. You buy more. The asset often recovers, then you sell a little to get it back into balance. ...

+1
Nailed it.

Maybe not. I've seen some studies that show re-balancing has as much or greater negative effect overall by selling off into a rising bull market.

I think it makes psychological sense if maintaining an AA you are comfortable with makes you feel better. But it could hurt in actual $$$ in the long run.

-ERD50

 

[audreyh1]

Maybe not. I've seen some studies that show re-balancing has as much or greater negative effect overall by selling off into a rising bull market.

I think it makes psychological sense if maintaining an AA you are comfortable with makes you feel better. But it could hurt in actual $$$ in the long run.

-ERD50

That "rising bull market" is a pretty major caveat. We haven't been in a rising bull market for a pretty long time now.

Sure - running full throttle will outperform in a two decade bull like the 80s and 90s, but we haven't been in that environment since 2000.

Note that rebalancing is NOT about maximizing long term gain. It's about managing short-term volatility and targeting a specific risk-adjusted return.

from http://www.retailinvestor.org/risk.html

 

[audreyh1]

By Decade 1960s through 2000s

from The Good, Bad, and Ugly of Strategic Asset Allocation | Investment Advice Done Differently
or
http://www.afcgllc.com/sites/afcgllc.com/files/u3/Efficient Frontier Revisited.pdf This one has a graph that includes 2002-2011

 

[NW-Bound]

By Decade 1960s through 2000s

from The Good, Bad, and Ugly of Strategic Asset Allocation | Investment Advice Done Differently
or
http://www.afcgllc.com/sites/afcgllc.com/files/u3/Efficient Frontier Revisited.pdf This one has a graph that includes 2002-2011

Nice!

The linked Web site actually labels this graph "The Inefficient Frontier?".

The decade of 2000-2010 has not been kind to equity investors, except for those who bought low sold high, er, rebalanced, or those who were still in accumulation phase.

In the longer run, equity investors may get rewarded again, but in that longer run, some of us geezers may be dead towards the end.

 

[karluk]

I note that this is the first decade since the 1960s where the expected return from a 100% bond portfolio is under 5%.

 

[audreyh1]

Nice!

The linked Web site actually labels this graph "The Inefficient Frontier?".

The decade of 2000-2010 has not been kind to equity investors, except for those who bought low sold high, er, rebalanced, or those who were still in accumulation phase.

In the longer run, equity investors may get rewarded again, but in that longer run, some of us geezers may be dead towards the end.

Yeah - all it means is that in a decade where stocks are severely underperforming other asset classes not only do you get more volatility but also worse performance - yikes!!!!!! The second link under that graph is more informative IMO, but I didn't have a way to share the graph embedded in the PDF.

The whole "efficient" term tends to confuse people anyway. I understand why Bernstein originally used the term since the curve shows you can get relatively more gain for less volatility when combining multiple asset classes. In other words - it's not a straight line but a curve. But then people naturally start confusing it with other terms like "efficient markets" and a whole host of stuff that is unrelated.

 

[NW-Bound]

The term "Efficient Frontier" was coined by Markowitz. People are accustomed to seeing the curve in your post #61, but the decade of 2000-2010 shows that it does not always hold.

A few months ago, I posted an article from Bernstein who lamented that getting the "optimal mix" of portfolio AA from actual market performance was a numerical process highly susceptible to minute variations in the data. In other words, people were fitting curves to noise!

 

[audreyh1]

The term "Efficient Frontier" was coined by Markowitz. People are accustomed to seeing the curve in your post #61, but the decade of 2000-2010 shows that it does not always hold.

A few months ago, I posted an article from Bernstein who lamented that getting the "optimal mix" of portfolio AA from actual market performance was a numerical process highly susceptible to minute variations in the data. In other words, people were fitting curves to noise!

Yeah - fortunately over multiple decades it does tend to more like post 61. I'd love to see that curve that included through 2013.

This one has the 1960-2011 curve: http://www.afcgllc.com/sites/afcgllc.com/files/u3/Efficient Frontier Revisited.pdf
and it's almost flat in performance between 70% and 100% equities - in other words, once you got above 70% equities, you just got more volatility with no additional gain.

Right - it was Markowitz. I just remember reading Bernstein's site. Yeah - people must have gone silly trying to "optimize" things by backtesting. I always pretty much took it as somewhere in the general 50/50 area probably would give a better performance versus volatility tradeoff.

 

[NW-Bound]

Yeah - fortunately over multiple decades it does tend to more like post 61...

Probably. However, I do not think I have too many decades left in me. It might be only 1.

Anyway, I am still holding 70% equity because I like the daily excitement.

 

[ERD50]

That "rising bull market" is a pretty major caveat. We haven't been in a rising bull market for a pretty long time now.

Sure - running full throttle will outperform in a two decade bull like the 80s and 90s, but we haven't been in that environment since 2000.

...

We've had two years of big gains. Even an annual rebal would have you missing some of the recent gains. Why does it require a decade long bull to outperform?

Note that rebalancing is NOT about maximizing long term gain. It's about managing short-term volatility and targeting a specific risk-adjusted return. ...

I think there are quite a few people who do think it will maximizing long term gain (buy low, sell high). Maybe I misinterpreted, but in your post, you referred to the dips as 'opportunities' - I took that as 'buying opportunities to improve your long term results', not 'opportunities to reduce volatility'?

-ERD50

 

[CaliforniaMan]

Yeah - fortunately over multiple decades it does tend to more like post 61. I'd love to see that curve that included through 2013.

This one has the 1960-2011 curve: http://www.afcgllc.com/sites/afcgllc.com/files/u3/Efficient Frontier Revisited.pdf
and it's almost flat in performance between 70% and 100% equities - in other words, once you got above 70% equities, you just got more volatility with no additional gain.

Right - it was Markowitz. I just remember reading Bernstein's site. Yeah - people must have gone silly trying to "optimize" things by backtesting. I always pretty much took it as somewhere in the general 50/50 area probably would give a better performance versus volatility tradeoff.

An interesting way to look at the various decades. Now if we could only tell what curve the next decade will have like a "financial professional" can then we would be much better off.

Their conclusion:

"A static portfolio may not be right
for changing market conditions.
Call your financial professional today
to re-evaluate your portfolio for
today’s markets—and ensure that it
still meets your risk/return expectations."